Fed QT balance sheet: -$34 billion in June, -$1.74 trillion from peak, to $7.22 trillion, lowest since November 2020

Quantitative tightening has so far removed 41% of the Treasuries and 29% of MBS that pandemic QE had added.

By Wolf Richter for WOLF STREET.

Total assets on the Fed’s balance sheet fell by $34 billion in June to $7.22 trillion, the lowest since November 2020, according to the Fed’s weekly balance sheet today. Since the end of QE in April 2022, the Fed has lost $1.74 trillion.

At the FOMC meeting in May, the Fed outlined how it will slow QT in order to reduce the balance sheet as much as possible without blowing anything up, slowly approaching the unknown level below which liquidity is too low, to avoid another debacle. such as the repo market implosion in September 2019 that caused the Fed to undo a large portion of QT-1 (blue in the chart above).

June was the first month under the new QT pace that reduces the Treasury runoff limit to $25 billion per month, but removes the MBS runoff limit, and whatever MBS comes out, it’s just off; any amount above $35 billion will be reinvested in Treasuries, in line with the plan to phase out MBS entirely over the “long term.”

QT by category.

Treasury securities: -$23 billion in June, -$1.33 trillion from peak in June 2022, to $4.38 trillion, lowest since September 2020.

The Fed has now removed 41% of the $3.27 trillion in Treasury securities it added during pandemic QE.

T-bills (2- to 10-year) and T-bills (20- and 30-year) “build” balances at mid-month and at the end of the month when they mature and the Fed receives the face value paid. The rollover is now capped at $25 billion a month and fell to about that much in June, minus the inflation protection the Fed earns in Treasury Inflation-Protected Securities (TIPS) that is added to the TIPS principal.

Mortgage-backed securities (MBS): -$19 billion in June, -$404 billion from peak, to $2.34 trillion, lowest since July 2021. Fed has removed 29% of MBS it added during pandemic QE.

MBS comes off the balance sheet primarily through principal payments that holders receive when mortgages are paid off (mortgaged homes are sold, mortgages are refinanced) and when mortgage payments are made. But existing home sales have fallen, and mortgage refinancing has collapsed, so fewer mortgages have been paid off and principal payments to MBS holders, like the Fed, have been reduced to a trickle. As a result, MBS has gone off balance at a rate that has been below $20 billion in most months.

Bank liquidity facilities.

Only two of the bank’s liquidity facilities currently show a balance: the Discount Window and the Bank Term Funding Program (BTFP). The banks’ other liquidity facilities—Central Bank liquidity swaps, repos, and Loans to the FDIC—are either at or near zero.

Drop-down window: +$200 million in June, to $6.4 billion. During the banking panic in March 2023, loans had grown to $153 billion.

The discount window is the Fed’s classic supply of liquidity to banks. The Fed currently charges banks 5.5% in interest on these loans — one of its five policy rates — and requires market-value collateral, which is expensive money for banks. In addition, there is a stigma attached to discount window borrowing. So banks don’t use this facility unless they have to, although the Fed has encouraged them to use it more regularly.

Bank term financing program (BTFP): -$1.6 billion in June, to $106 billion.

BTFP had a fatal flaw when it joined the cobbles during a panic weekend in March 2023 after SVB had failed: its rate was based on a market rate. When Rate Cut Mania began in November 2023, market rates fell even as the Fed held its rates steady, including the 5.4% it pays banks for reserves. Some banks then used BTFP for arbitrage profits, borrowing on BTFP at a below-market rate and then leaving the money in their reserve account at the Fed to earn 5.4%. This arbitrage caused BTFP balances to increase to $168 billion. The Fed closed the arbitrage in January by changing the rate. It also allows the BTFP to expire on March 11, 2024. Loans that were taken out before that date can still be held for one year from the date they were taken out. By March 11, 2025, BTFP will be zero.

So, over the next 8 months, the BTFP will take another $106 billion off the balance sheet, on top of the regular QT.

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